Solar panels

Every week I get asked about solar panels. Do they add value? Should I price my listing higher? Will buyers pay for it? These are big questions and there’s no quick answer. But here are some things I think through and bring up when people call. This is just over ten minutes. Then for those interested, I have a huge market update to talk through the kinda sorta normal spring market.

A Podcast I did with Norm: If solar isn’t your thing and you need a podcast to listen to, I just talked with Norm Shriever about appraisals, owning islands, Zillow, my Dad bod, etc… Listen directly on YouTube if you wish.

As always, thanks for being here.

—–——– Big local monthly market update (long on purpose) —–——–

Spring is feeling fairly normal so far. What a difference from the doom we felt in the latter half of 2018. Let’s talk about it.

It feels flat around here: Prices are definitely up from the big lull we had during the fall season, but they’re not up by much compared to last year. This is why I’ve been describing the market as flat. Most price metrics in the region are up only 2-3% over the year. In the region we’re seeing prices about level with the height of last year, though in Sacramento County we’re slightly above. This could obviously vary by neighborhood.

A more normal spring: I was talking to a real estate agent today and she said, “You know, it just feels like a normal spring.” I tend to agree. Stats are showing normalcy and we’re seeing what we’d expect to see at this time of year. Prices are up, inventory is down, sales volume has ticked up from the fall, it’s taking less time to sell, and pending sales have been strong. This doesn’t mean the market is perfectly healthy, but from a stats perspective it’s been fairly normal.

2,500 less sales this year: On one hand sales volume has recovered this spring to almost normal levels, but over the past year volume is actually down 8.5% in the region. I know that doesn’t sound like much, but think about it this way. There were 2,500 less sales this year in the region compared to last year. While this isn’t the sign of a market meltdown, it’s definitely something we have to watch. At best I would say this is an off year, and at worst it’s a symptom of the market starting to change in more significant ways (which we will only know as time unfolds). In short, don’t write home over this yet, but keep an eye on it.

Zillow: Last week Zillow announced they’ll be entering the Sacramento market by the end of the year. This is huge news, but it’s really what we expected. These days there are a handful of tech companies trying to challenge the traditional real estate model by buying privately from sellers and then re-listing on the open market. There’s lots to say about this and I’ll have some posts in the future. For now I just wanted to say I find it ironic that as much as Zillow loves to tout their accuracy rate, they won’t be buying properties based on the Zestimate. Otherwise I imagine lots of overvalued owners would jump at the opportunity, right?

Low rates are the x-factor: At the end of 2018 it seemed like the market was ready to take a dive, but lower rates this year have helped bring buyers back into the market and sustain higher prices.

Real estate is like the stock market: When I say the market is slower I get a little pushback at times. The idea is, “Dude, I just had 14 offers on my house. How dare you say the market is slow!!!” Look, it’s impossible to describe every neighborhood and price range with just one statement. This is why I say the real estate market is like the stock market. While the market as a whole might be doing one thing, not every stock is experiencing that same exact trend. In the same way, not every neighborhood, price range, or property type can be explained the same way.

Do cannabis dispensaries increase residential value? I did an interview last week with CBS 13 to talk about a study that claims cannabis dispensaries increase the value of surrounding residential properties. You can click the link to hear my take. In short, it’s true that vibrant commercial sectors can help increase value. But I’ve never met a buyer who said, “I’ll pay more because of a dispensary down the street.” In my experience locally at least, many people don’t even know dispensaries are there unless they’re cannabis connoisseurs. In short, I tend to be skeptical of studies like this.

Hey girl, let’s have bubble talk: Prices are just about back to where they were fourteen years ago when the market collapsed in 2005. In fact, most price metrics in Sacramento are within 1-3% of the peak. This means with just a little more modest price growth we might be having “Hey girl, we’re back” (yes, that was a Ryan Gosling reference (sorry)).

Keep in mind the market in 2005 was much different than today and there is no such thing as a formula where the market “pops” if we reach 2005 levels. Technically speaking, current values aren’t actually anywhere near 2005 when we consider inflation. But you know, very few buyers actually think about inflation like this – unless they’re economists, grad students, real estate geeks, etc…. In case it helps, here’s a post I wrote about buyers worried about another housing bubble.

Appraisals coming in lower: I’m hearing from some contacts of appraisals coming in lower than the contract price. As the market slows, this is something we’ll likely see more frequently if properties are getting into contract at prices that cannot be supported by market data. Of course some appraisals may legitimately come in too low, and I’m not naive about that. Whatever the case, I’d advise sellers to price realistically and in some cases pick the strongest offer instead of the highest one.

Price sensitivity: Literally half of all homes last month had multiple offers in the Sacramento Region. This reminds us buyers need to bring strong offers. But sellers ought to price correctly too. Buyers are not desperate and willing to pay unrealistic prices, so I advise aiming for the market instead of that one mythical buyer who will overpay for some reason. Remember, the market is very competitive, but that doesn’t mean prices are going crazy.

I could write more, but let’s get visual instead.

FOUR BIG ISSUES TO WATCH:

1) SPRING GETTING HOT: The market is heating up for 2019. We’re seeing price changes, lower inventory, and increased sales volume. So prices are up from the dull fall, but they’re also flat as you can see under #4.

2) SLOWING MOMENTUM: Despite the heating, stats show the market is slowing down when we look at the rate of change by year. Looking at monthly, quarterly, and annual numbers helps give a balanced view of things.

3) SALES VOLUME SLUMP for 11 months: It’s important to look at sales volume in a few ways to get the bigger picture. Here it is by month and year.

SACRAMENTO REGION:

Key Stats:

April volume down 8.2%

Volume is down 8.5% over the past 12 months

SACRAMENTO COUNTY:

Key Stats:

April volume down 6.8%

Volume is down 7.2% over the past 12 months

PLACER COUNTY:

Key Stats:

April volume down 4.3%

Volume is down 8.9% over the past 12 months

EL DORADO COUNTY:

Key Stats:

April volume down 2.4%

Volume is down 12.5% over the past 12 months

4) LAST YEAR VS THIS YEAR: Check out the price metrics below. Can you see why I’m saying prices seem flat lately? This may not be true in every single price range or neighborhood of course, but this shows us price momentum is slowing. With that being said, it’s still okay to say the market is “hot”. It is. But I’d say competition is hotter than price appreciation.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

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Sellers often expect buyers to pay the full cost of a solar system. So they say, “I spent $30,000 on this system, so let’s price it $30,000 higher.” I get the sentiment, but is it reasonable? Let’s talk about it.

This isn’t a “how to value” solar post, but a conversation focused on some logical points that might help sellers see why buyers often don’t pay the full cost of an owned solar system in the resale market.

1) Location: I don’t doubt the value of solar, but I do doubt the market always recognizes the full cost of solar in the resale market. If a solar salesman says the value is always the same as the cost of the system, that sounds like a great sales pitch. Is it real though? Does it work in Alabama, Missouri, and Antarctica? Is it the same for a $75,000 house compared to $850,000? Probably not.

2) Dollar for dollar: It’s always the dream in real estate to get buyers to pay dollar for dollar for any home improvement done by sellers, but that’s not so easy to pull off. Even if you look at Remodeling Magazine’s 2018 Cost vs. Value Report, hardly any items on the list give close to a 100% return compared to the cost. Of course solar is different because it saves money, but there still might be a principle here worth considering.

3) Age of the system: Imagine a solar system that is built to last 20 years, and it’s now 5 years old. An owner says, “I know the system isn’t new, but I paid $40,000 for it, so a buyer should pay $40,000 too.” That’s a nice thought, but the system is 25% used up already, so why would a buyer pay the full cost of a brand new system? It would be like saying, “I realize my car is 5 years old, but I want you to pay the sticker price from the dealer because that’s what I paid.”

4) Rebates: Were there any rebates when the owner purchased the solar system? For instance, if there was a $5,000 rebate for a $25,000 system, that means the real cost of the system was $20,000. This is important because why would a buyer pay $25,000 if the seller technically paid $20,000? Moreover, newer systems are bound to be more efficient and maybe even less expensive, so why pay full cost for an older system?

5) Savings: Imagine an owner saves $150 per month on her energy bill for a solar system that cost $25,000. In this situation at $150 per month it would take 14 years to save the full $25,000. Would buyers pay upfront for 14 years worth of savings to keep $150 per month in their pocket? Are buyers even going to be in the property that long? Let’s remember the benefit of solar is realized over the course of two decades, so paying for all of that benefit in one instance may not reflect what most buyers are willing to do.

6) HUD solar programs: A home owner told a Realtor friend that HUD allows appraisers to add the cost of a solar system into the value. That sounds like an awesome idea, but it isn’t true. Appraisers don’t have a mandate from HUD or Fannie Mae to handle solar by adding the cost of the system to the value. What is true though is FHA allows owners and buyers to add solar on a purchase or refinance and get a loan (in some cases) for the full cost of the energy improvements. See page 453-454 in the HUD manual.

The puzzle of solar: This isn’t a post to explain how to value solar, but I hope some of the points above might bring perspective. In short, valuing solar is like a puzzle. We have to look to many pieces for the answer, so we’ll check out comps, consider the cost and age of the system, be in tune with how much money is saved each month, etc… If you think it would be useful, I can do a follow-up Q&A post about valuing solar (let me know).

Solar is a hot issue right now in real estate. Actually, I should say it’s more of a gray area for many in the real estate community since it’s still an emerging market. This is exactly why I wanted to interview Kevin Nunn since he knows more about solar than most. Kevin is a loan officer with Umpqua Bank, he teaches classes on energy efficiency, and he has even sat down with policy makers in DC on issues relating to solar. In the interview we touch on the difference between leased and owned solar, whether a leased system can transfer to a buyer, and advice for the real estate community. Enjoy the interview, and be sure to pay close attention to the asterisk where Kevin mentions the PACE programs (big point).

Me: Kevin, what is your background with solar?

Kevin: I have been promoting the benefits to buyers of including energy upgrades in home purchases for over 20 years, and many organizations have reached out to me for assistance in this area. I was even asked to go to the White House last year to assist in this area.

Ryan: What is the difference between leased and owned solar in the eyes of a lender?

Kevin: I can’t speak for all lenders as each can set their own policies. It is obviously challenging to value an owned system, but no value can be given on a leased system.

Ryan: Is it a problem to lend on a property with a leased solar system? In other words, can a leased solar system transfer to a new owner?

Kevin: It has been my experience that the companies with a lease are very cooperative with transferring the lease. One challenge with a leased system is that the payment must be included in the buyer’s qualifying ratios.

Ryan: Why do so many people say a leased solar system cannot transfer to a new owner when you say it can?

Kevin: Provided the buyer can qualify with the lease payment included, I haven’t had any issue with this. Each lender sets their own guidelines. Some may impose overlays that exclude this. Many see the UCC filing as a superior lien to the mortgage. I have found the leasing companies to be extremely accommodating about removing their UCC and putting it back after the new mortgage records (see comments on the PACE programs below where a “lease” has to be paid off prior to a property selling).

Ryan: What is a “UCC”?

Kevin: UCC stands for “Uniform Commercial Code”. It is effectively a lien against the solar equipment. Lenders have a concern that it could take priority over the mortgage if it was recorded before the deed. That’s why the UCC generally needs to be released and re-instated after the mortgage.

Ryan: Any advice for real estate agents who are marketing properties with solar systems?

Kevin: If it is a lease, contact the leasing company up-front and get their terms for assumption and their acknowledgement they will accommodate the UCC issue. Make sure any lender pre-qualification letters have factored in the lease payment.

* If the system is owned make sure it is not financed through one of the PACE programs that are being promoted right now. Homeowners are led to believe these “assessments” will just transfer over to a new buyer. Fannie Mae and Freddie Mac have been very clear that they will not purchase a loan with these “assessments” in place. It often comes as a very big surprise to owners and Realtors that the PACE must be paid off or they may only be able to sell to a cash buyer.

If the system is owned they should make sure there are local and relevant comparable sales with solar that clearly demonstrate any additional value solar adds in that specific neighborhood.

Ryan: What advice would you give to someone considering purchasing a leased solar system or a house with leased solar?

Kevin: If they are using FHA financing I would suggest they take a look at using the 203(k) and EEM (Energy Efficient Mortgage) to include a new system they could actually own on their house. The 203(k) is ideal for solar because it allows almost 10% in upgrades without value consideration. This is a great opportunity for buyers that is very under promoted. If they are going to purchase the house with the leased system in place they should review the lease terms very carefully and make certain their loan officer has properly factored in the lease payment so they don’t run into issues in underwriting.

Ryan: What do you think of the exhaustive studies out of Colorado (pdf) and Berkeley (pdf) that give a specific value for solar power? Can we apply these values figures to our local market in Sacramento?

Kevin: I applaud these efforts, but I have found that they often do not appreciate the constraints we operate under or the dynamics of our industry. In reality, lenders have to look at a solar system just like any other feature on a property. That property is the security for the loan that has been extended to a consumer. In the event of a foreclosure, the lender has to know that they will be able to resell the property and recover their loan. In this way a solar system is just like any other feature on the property. The reason it is so crucial to use an appraiser with local market knowledge is they understand the premium a specific feature will add in a specific market. Just like a swimming pool will have a different value impact in one community verses another, solar has the same dynamic. National studies and state-wide studies are useful on some level, but real estate is always local.

Ryan: Lastly, where do you see the solar market going?

Kevin: I think it would be hard to find anyone who doesn’t agree that it is a good thing to make homes for affordable, comfortable, and dependable. Clearly there should be a difference in how energy measures like solar are viewed compared to features like a swimming pool. The challenge for lenders is finding the ways to accommodate this within the constraints they operate in. There are a lot of people who are working very hard to find these solutions. I do expect to see changes coming out soon to allow for this. Also, as more solar systems are installed it is going to get a lot easier to quantify the value differential in individual neighborhoods.

———————————————————————————————————–

Thank you Kevin for doing the interview. I hope it was helpful for everyone.

Closing Appraisal Thoughts:

A leased solar system is considered personal property and does not factor into the appraised value. If the system is not owned, it generally is not an asset for the property. This is why I recommend listing agents to be clear in MLS on whether a system is owned or leased.

Keep in mind solar panels may not be worth the same amount in every price range or market. For instance, in Sacramento they seem to carry less weight on the lower end of the price spectrum, but more weight on the higher end of the market. This is why we cannot blindly apply value adjustments from the Colorado and Berkeley studies referenced above without researching the local market. What are buyers actually willing to pay for solar panels? One way to know is to compare homes with owned solar vs homes without solar.

I recommend being careful to be sure the numbers really work to your advantage for leased solar. If the UCC can be removed so you can sell your property, that is great. But having amazingly low energy bills won’t do anything for you if your lease is actually more expensive than your bills would have been without solar. A lease like this could actually be a liability for your property value, right? In other words, if it is more expensive to own your property, consumers are not likely to pay as much for your house compared to other ones in the neighborhood.

Questions: What has been your experience with solar and real estate? Do you see buyers willing to pay a premium for solar features? Please share any stories or points for consideration.

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